The Evolution of ESG
Guest Post: Paul Clements-Hunt, Head, UNEP Finance Initiative (2000–2012)
It was late Spring 2004 on a greying afternoon in my grey office in a bureaucratic outpost far removed from the diplomatic finery of some of Geneva’s grand United Nations buildings.
Three UN officials, a handful of young, paid contractors and a small posse of unpaid interns had been fighting a losing rear-guard action to shape and own the complex space between the multilateral system and the opaque, sophisticated multi-trillion dollar world of capital markets and investment.
With zero political support within the UN and no resources, only huge amounts of guerrilla-action and “off reservation” chutzpah had kept the UNEP FI action to inject authentic consideration of social, environmental and governance issues into the investment chain going.
But the challenges were growing apace with the well-resourced International Finance Corporation (IFC) and Secretary General Kofi Annan’s shiny new UN Global Compact circling to take over UNEP FI’s hard fought battle to protect its patch.
Despite the boot-strapped expenditure I was now managing a rapidly increasing debt, running into hundreds of thousands of dollars, as the unapproved, unbudgeted, off the UN books spend of cash was gathering pace.
A report exploring Social, Environmental and Governance issues in the context of capital market analysis was just about to be launched by UNEP FI’s new asset management working group.
The report’s conception, evolution and delivery was supported by the jaw-dropping collective smarts of my young team, including amongst others, Jacob Malthouse, James Gifford, Gordon Hagart, Philip Walker and Trevor Bowden, shepherded, sometimes directed but always protected by Yuki Yasui, Ken Maguire and myself as the three UN officials responsible for UNEP FI.
And so to that grey afternoon: the report launch, still to happen, would go well in the end and the hidden treasure provided by the sell-side analysts of the mainstream investment sector looking at governance, occupational health, environmental and broader social issues, across 11 industrial and business sectors, was a massive surprise.
What was the sexy phraseology that would capture the mainstream’s imagination? Intuitively, it should start with Governance, the G, as that seemed to dominate the business world but GES just did not feel right, did not have the right ring to it, and was a touch awkward, a touch too technical perhaps?
Following the early 000’s scandals of the dot-com boom and bust, as well as the seemingly endless corporate mayhem out of the US, with the Enron meltdown the signature example, the business and investment community were more familiar with the G.
Environmental issues, the E, were just starting to get their own embryonic investment metrics and increasingly business and investment could see their relevance while not wanting to integrate them into fundamental financial analysis.
But Social, the S, was the real problem, the outlier the investment chain felt most uncomfortable with and, possibly, with a whiff of socialism about it could open the Pandora’s box of labour rights and even human rights issues.
My instinct was two-fold, leave the S on the end of GES and it would risk being “flicked off” by lobbyists uncomfortable with anything which challenged the Milton Friedmann doctrine of the “business of business is business.” Our collective conversation ebbed and flowed that afternoon.
So let’s stick the S in the middle to protect it, weld environmental upfront and live with G at the end. My 1980s UK tabloid journalist instincts told me that ESG had a better ring, was sexier, might event get traction? In a true collective decision, this young team, a million miles from the pay packets, hubris and might of Wall Street and The City, agreed and ESG was born.
In 2020, 16 years on, the global success of ESG within the worldwide investment community, means it has many “mothers and fathers” but the small, young UNEP FI team of unimaginable creativity and passion know from where it sprang on that grey day in a grey UN office.
